Beyond Buy-and-Hold #10
By Rob Bennett
I?ll tell you why in a moment.
But first things first. Investing is a money issue. When you can?t trust someone to tell you the truth about a money issue, you have a great practical need of a means of finding out how that person is steering you wrong. Before I do anything else, I am going to provide those of you who cannot trust me to tell you the truth about stock investing (that?s all of you!) links to four articles that may help a bit:
1) My friend Frank at the Bad Money Advice blog recently posted an article expressing a great deal of skepticism about the Valuation-Informed Indexing strategy, the strategy that I recommend at this column. The article is titled The Truth About the Shiller PE;
2) My friend Pop at the Pop Economics blog not too long ago wrote a well-argued piece questioning my investing beliefs. That one is called Resistance Is Futile: Why Buy-and-Hold Beats Value Investing.
3) I have an article at my web site titled The Case Against Valuation-Informed Indexing that lists the arguments against my approach that I find most convincing; and
4) I also have an article at my web site identifying some personality traits that I possess that might cause my investing advice to miss the mark from time to time. That one is called Rob Bennett?s Weaknesses as a Money Advisor.
I believe in Valuation-Informed Indexing. I think it is the future of middle-class investing. I sincerely think that it will permit you to earn far higher returns while taking on far less risk. So why the heck am I pointing out weaknesses in the concept?
It?s just this sort of thing that makes this new approach so powerful.
What makes Valuation-Informed Indexing superior to Buy-and-Hold is that it considers the effect of valuations, a factor that analyses done under the Buy-and-Hold Model ignore. That?s the only difference. Since there is only that one distinction, it is easy to be fooled into thinking that these two strategies are not all that different. They are very different. That one distinction relates to the single most important factor bearing on investing success or failure — investor emotions.
To understand, you have to grasp what it is that is happening when stocks become overvalued or undervalued. All overvaluation and undervaluation is irrational; if investors were acting rationally, they would price stocks properly. So all overvaluation and undervaluation evidences investor emotion.
Buy-and-Hold ignores valuations/emotions altogether. Taking them into consideration changes all investing analyses in a fundamental way. We take a huge leap when we move from Buy-and-Hold to Valuation-Informed Indexing. We move from an investing model that deliberately ignores half of what needs to be considered to get the numbers right to one that at least attempts to look at everything that matters (but which inevitably fails to achieve this goal).
?But which inevitably fails to achieve this goal? — Those are the most important words in this article. Do you see where I am going with this?
Stocks are bought and sold by humans. Humans are emotional. So it is not possible to invest successfully without taking emotions (that is, valuations) into account. But there is no human who is 100 percent honest about his own emotions. There never has been one and there never will be one. We are by nature self-deceivers and therefore inevitably also at least at some times deceivers of others (we can hardly tell the truth to others when we are not even willing to accept it ourselves). No?
I have been at a zero stock allocation since the Summer of 1996. I can spin out thousands of words making the case for why I did the right thing to get out of stocks and stay out of stocks for 14 years. And I am convinced! I believe what I say! But does that mean it is all true? That?s a very different question.
Rob Bennett Readers Beware! This man is a known liar. And he is trying to tell you what to do with your retirement money. You better check him out carefully! You better scrutinize his every word!
In fairness to me, I am not the only human that has been known to stretch the truth on occasion. Those Buy-and-Hold guys are human too. It has come to my attention that they might be capable of telling a bit of a tale from time to time as well. You might want to approach their investing claims with a bit of skepticism too.
We?re all liars. So, whoever we choose to go to for investing advice, we are going to a known liar when we do so. Yikes!
I don?t want to leave you on a down note. There?s a time-tested way to deal with this problem.
Read both sides. Read this column to find out about the fibs being put forward by the Buy-and-Hold fellows. And then read the good work being put forward by Frank and Pop and lots of others to find out about the places where that smooth-talking Rob Bennett individual is spinning you into a bad place.
Frank tells the truth in that article. It?s the same with Pop.
No, wait — I don?t actually think that?s entirely so. But they tried! That?s the best we can ask for from any of the humans.
And I try too. Just don?t ever put your confidence in a single word that I put forward solely on my say-so, okay? I like to think that you can learn something from reading my stuff. But you cannot trust me to tell you the truth about stock investing. I?m one of those darn humans and that?s just the way it is down here in the Valley of Tears.
Rob Bennett thinks we should stop kidding ourselves about the Efficient Market Theory. His bio is here.